Aug. 26 (Bloomberg) -- Chilean pension funds are boosting
holdings of foreign bonds to record levels as they turn to debt
from countries such as Brazil and Mexico after a dearth of local
corporate sales pushed yields to a two-year low.

Chile’s six private pension funds tripled holdings of
foreign fixed-income assets in the past 12 months to $20 billion
at the end of July, while cutting local holdings by $2.5
billion, according to the industry’s regulator.

The average peso-denominated corporate bond yield tumbled
to 3.72 percent on Aug. 24, the lowest since April 2008, after a
decline in offerings cut the supply of the securities, according
to Santiago-based data company LVA Indices. In Brazil, by
comparison, local corporate bonds pay yields linked to the
country’s benchmark 10.75 percent overnight rate.

“More adventurous investors can buy in other countries in
the region where yields are more attractive and swap into local
currency,” Ricardo Gomez, head of fixed income at Larrain Vial
SA in Santiago, said in an Aug. 18 telephone interview. “There
are opportunities in Brazil, Colombia and Mexico.”

Overseas bond investments can return a yield of more than
500 basis points, or 5 percentage points, over interest-rate
swaps, compared with less than 350 basis points for Chilean
bonds, said Rodrigo Nader, who runs a $427 million closed-end
fund at Santiago-based Celfin Capital SA. About 80 percent of
his Deuda Latinoamericana fund is invested in Brazilian and
Mexican corporate debt, followed by bonds from Colombia, Peru
and international bonds sold by Chilean companies, he said.

Nader said he plans to re-open his fund to investors in
September after selling out of fund quotas in June. “There’s a
lot of demand,” he said in a telephone interview.

Stamp Duty

Chilean companies and banks sold $2.4 billion of local
bonds in the first seven months of this year, down from $4.1
billion in the year-earlier period, according to the Santiago
stock exchange. Companies sold a record $7.5 billion in all of
2009 as they took advantage of a temporary suspension of the 1.2
percent stamp duty on credit.

The $20 billion that pensions had in foreign fixed-income
holdings accounted for a record 16 percent of their total assets
under management last month, according to the pension regulator.
The percentage is up from 6.2 percent, or $6.4 billion, in July
2009 and 0.1 percent in July 2007, according to the industry
regulator, which doesn’t report fixed-income holdings by
country.

Corporate Yields

Pension funds increased total fixed-income holdings by
almost $11 billion in July from a year earlier. The entire
increase is accounted for by purchases of foreign bonds,
according to data from the pension regulator. Executives at
Santiago-based pension funds AFP Habitat SA, AFP Modelo SA, AFP
Provida SA, AFP Cuprum SA, AFP Capital SA and AFP Planvital SA
didn’t respond to requests for comment.

Corporate dollar debt yields an average 6.23 percent in
Brazil and 6.99 percent in Mexico, compared with 4.33 percent in
Chile, according to JPMorgan Chase & Co. indexes.

The extra yield earned on Chilean corporate peso bonds
instead of government notes narrowed to 35 basis points on Aug.
17, the lowest since June 2008, from 204 in February 2009,
according to LVA Indices.

Facundo Torres, who started a $50 million Chilean bond fund
for Celfin in June and still has $10 million left to invest,
said he competes with pension funds and insurers in trying to
find local securities to buy.

Low Liquidity

“There’s lots of demand and there hasn’t been any supply
and that has meant spreads have fallen to pretty low levels,”
Torres said by telephone from Santiago. “It’s difficult to get
assets. We buy Chilean bonds overseas and we do a cross to local
currency and that way we get more attractive spreads, but there
isn’t much liquidity in that market either.”

Five non-bank companies sold bonds in Chilean pesos or
unidades de fomento this year worth $497 million in the first
seven months of this year, compared with $677 million sold in
December alone, according to Santiago stock exchange data.

The amount of corporate bonds held by banks, pension funds
and mutual funds increased 8.7 billion pesos in the first half
of this year after growing 701.8 billion pesos in the last six
months of last year, according to central bank data.

Economic Slump

Average Chilean peso corporate bond yields rose to 5.35
percent last year amid the worst economic slump in a decade,
according to LVA. At the same time, corporate bond sales more
than doubled to 3.6 billion pesos, according to data from the
securities regulator.

The extra yield, or spread, investors demand to buy Chile’s
10-year dollar bonds instead of U.S. Treasuries dropped to 90
basis points today from 97 basis points on Aug. 24, according to
BNP Paribas SA prices. The difference in yield between Chile’s
10-year international bonds in pesos and its similar domestic
debt was 95 basis points today.

The peso rose 0.6 percent to 503.22 per U.S. dollar at
10:12 a.m. New York time today, from 506.45 yesterday.

The government suspended a stamp duty on loans even as
banks cut access to credit, enticing companies wishing to take
advantage of the tax break to sell bonds. Bank lending fell for
seven straight months in 2009 as Chile’s economy shrank amid the
global financial crisis.

This year, with the economy growing at the fastest pace in
five years, companies have turned back to bank loans as banks
cut the rates they charge and eased restrictions, according to
central bank loan surveys. The average interest rate Chilean
banks charge for a short-term commercial loan in pesos dropped
to 3.6 percent in May 2010, from 10.3 percent a year earlier,
according to central bank data.

Investment-Grade Notes

Insurance companies including Principal Financial Group
Inc. have turned to investment-grade notes abroad, said Valentin
Carril, who oversees $3 billion in fixed income as chief
executive officer of Principal’s asset management unit in
Santiago. Carril, who swaps investments back into local
currency, said he will only invest in countries with investment-grade ratings.

“We didn’t do anything for at least two years because
yields in Chile were better and it didn’t make sense,” Carril
said by telephone. “In 2010 we have been much more active.”

To contact the reporter responsible on this story:
Sebastian Boyd in Santiago at
sboyd9@bloomberg.net

To contact the editor responsible for this story:
David Papadopoulos in New York at